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Czech Republic: Economy in Trouble But Not In Crisis

By Jiri Pehe

Prague, April 4, 1997 (RFE/RL) -- The Czech economy is in trouble, experts and politicians agree. But they disagree on whether the country is in an economic crisis.

The opposition Social Democrats like to describe the current problem in catastrophic terms. The government claims the problems are not systemic and can be rectified.

The most serious problems include a slowdown in industrial production, a state budget deficit, a skyrocketing foreign trade deficit, and a rapid growth of wages outpacing the growth of labor productivity.

The Government admits that some of these problems are serious. But it also says that they are basically termporary. For example, the slowdown of industrial production in recent months can be blamed on the harsh winter. The budget deficit, which amounted to some $ 326 million in the first three months of 1997, is partly being blamed on a bad tax collection system. The rapidly growing trade deficit, which is expected to reach an annual record high of over $ 8 billion, is partly attributed to economic problems in Germany, the largest export market for Czech companies.

Such explanations may be partly true but the causes of the current problems run deeper. Owing to the government's privatization program, most Czech companies are now in private hands but many of them have failed to undergo restructuring. This has partly happened because the voucher privatization program that played an important role in the Czech privatization process has failed to create clear ownership relations. Many individuals have sold their vouchers to proliferating investment funds, largely owned by the banks that are, in turn, either owned by the government or by large investment funds themselves.

In addition, many companies continue to be run by managers whose interest is to enrich themselves and leave, rather than to streamline, rationalize, and increase their company's productivity.

Many such companies run large debts, putting the bank sector under strain. More than a dozen banks have collapsed in the last three years--some owing to incompetence of new owners; some owing to fraud; and some because they could not cope with large, unpaid debts. In short, problems in the banking sector point to deeper problems in the Czech economy as a whole.

At the same time, those companies that have moved to restructure are importing large amounts of Western technology. While such imports are improving the companies' competitiveness, they are increasing the foreign trade deficit.

The foreign trade deficit is also fueled by growing individual consumption which, in turn, is tied to rapidly increasing wages. Perhaps the most troubling developments of recent months concern the apparent lack of discipline and fiscal responsibility on part of trade unions, company management, and individual consumers. And the lack of discipline in spending produces widespread doubt, shared by ordinary people as well as companies, about the overall health of the political and economic systems in the country.

That feeling mistrust has been fueled by recent collapses of banks and large-scale frauds in investment funds. Companies and individuals seem to think it is safer to spend rather than to save. Such an attitude contributes to growing imports and makes it difficult to control inflation.

The current liberal-minded government has postponed any restrictive or interventionist moves, such as introducing import tariffs, devaluing the crown, cutting budget, or reintroducing wage controls. But there are indications that some of these measures may be introduced soon. The government is also reported to be envisaging an issue of high-yield bonds to help channel people's spending into savings.

The most important challenge facing the government, however, is political: to be effective it must regain a degree of publicUs trust. And to accomplish that, it must act.

Despite the existing problems and doomsday scenarios the Czech economy continues to grow at the rate of over 4 percent a year. This suggests that the economy is more robust than the critics suggest. Many problems seem to have been caused by the governmentUs neglect to create an environment in which financial operations would be transparent and easily verifiable and industrial enterprises reorganized to cope with market rules. In short, a more activist free market policies by the government may be what the Czech economy needs most.